Is a Business Loan a Good Idea?

If you have a business then it may be that you have had a loan in the past or are considering one now. A loan can be a great opportunity to expand your business or to start one up but there can be drawbacks to having one. It is good to think about how it can benefit the business, but it is all too easy to forget about the risks that you are taking with a loan. It is worth evaluating the pros and the cons before making your final decision.

Repayments

You need to think hard about whether your business will be able to afford the repayments. You should be able to find out how much the repayments will be before you sign up to the loan. You then need to think about whether you will have that much money available each month to be able to make those repayments. If you are an established business then you will be able to look at your accounts in order to find out whether you have enough spare money each month in order to make those payments. If your income varies then this could mean that you will be taking more of a risk than if you have a constant income. If you are a start-up business then you will not know whether you will make enough. However, you should have put together a business plan and predicted how much money you may make. This is usually necessary in order to apply for a loan and so you will be able to use that to work out if you can manage the repayments.

It is always good to have a backup plan as well. Even if you are completely confident that you will be able to repay the loan you will need to think about what might happen if you have a month when you cannot make a repayment. It would be wise to have a savings account that you can draw form or consider whether you have any other income sources that you might be able to use.

Limited future spending

If you need to find a loan repayment each month then it will mean that you will have to be really careful about how much you are spending during the course of the loan. This means that if you need to buy things for your business, then you may have to delay doing so. This may be okay if it is something that is not urgent but if it is something that you really need or that will make a significant difference to your business then it could have a big impact. You may think that you can just borrow more money, but this will mean that you will be repaying more each month which you may not be able to afford. You will also be limited in how much you can borrow and you may just not be able to find a lender prepared to lend you more money.

Risk of bankruptcy

If you do not manage to make your payday loan repayments then your company could go bankrupt. You might think that this will be okay because it is just a business going under and you will be able to walk away and carry on, perhaps starting a new business or getting a conventional job. Howeber, it is just not as simple as this. It is hard to imagine bankruptcy when you have a great business idea or your business is doing well but you do need to make sure that you are prepared If your business does go bankrupt and you are a director or the sole trader or a partner then it reflects on you and your credit record as well. It will mean that your personally will not be able to get a loan, mortgage or things like this. You will have the guilt of not paying what you owe and you will have to repay it all anyway, the debt is not just written off.

So although a loan can really lift your business or get you going, it is worth being cautious. All loans have a risk and you need to make sure that you will be able to repay it and that you will be able to manage to buy all of things the business mean as well as cover the cost of those repayments. Obviously there can be lots of benefits as well and it may be that you cannot start the business or expand without borrowing money. As long as you are aware of the risks and you work hard to make sure that you make the repayments and are sure that you will be able to continue paying into the future then you should be okay. Having a backup plan just in case repayments get tricky can also be a very wise thing to do.